One possible explanation is that they actually thought the bank would be bought out at the last minute, just as Bear Stearns was. In both cases, the parties worked feverishly over the weekend after the stock's collapse to try to negotiate a deal. For Bear Stearns, the negotiations succeeded, with the help of the New York Federal Reserve, which provided the loan used by JPMorgan Chase to complete the deal. With Lehman, however, the interested buyer was British, and the help that was needed was from the UK Chancellor of the Exchequer, Alistair Darling. The weekend after the September 11 stock collapse, intense negotiations were pursued with Barclays Bank, which was prepared to underwrite Lehman's debts; but it needed a waiver from British regulators of a rule requiring shareholder approval. Negotiations continued until the market was getting ready to open in Japan on Sunday, but UK Chancellor of the Exchequer Alistair Darling would not give the necessary waiver. He said something to the effect that he did not want to infect Britain with America's cancer. The sentiment was understandable, but the question was, why did he wait until it was too late for the Treasury or the Federal Reserve to move in with other arrangements?
The issue takes on more significance in light of the fact that Chancellor Darling played a similar role in another 9-11 collapse the previous year. On September 11, 2007, frantic customers were lining up outside Northern Rock, the UK's fifth largest mortgage lender, in the first British bank run in 141 years. The bank's shares plunged 31% in a single day. Like the collapse of Lehman Brothers in the U.S., the bankruptcy of Northern Rock changed the rules of the game. Britain's major banks too would now be saved at any cost, in order to avoid the loss of customer confidence, panic and bank runs that could precipitate a 1929-style market crash.
With Northern Rock, as with Lehman Brothers, Alistair Darling could have saved the day but backed down. Northern Rock had a willing buyer, Lloyds TSB; but the buyer needed a loan from the Bank of England, which the Bank's Governor, Mervyn King, had denied. Darling was advised by his staff to overrule the Governor and grant the loan, but this would have cost political capital for UK Prime Minister Gordon Brown, who had been widely lauded for giving the Bank of England its independence in 1997.
Brown is criticized domestically for precipitating the financial crisis with errors made as Chancellor of the Exchequer before he became Prime Minister. Critics maintain the British Treasury has abdicated its responsibility as the financial overseer of the British economy to the Bank of England, which in many ways controls the government, because its advice is always followed regarding the British budget. The whole scenario suggests that the much-vaunted virtues of an independent central bank are overblown. Some economists, including Milton Friedman and Ben Bernanke, blame poor policymaking by an independent Federal Reserve for bringing on the Great Depression of the 1930s.
Shock Therapy?
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